How To Improve Your Sales Commission Compliance

How compliant is your commission process? This article details how to assess and improve your sales commission compliance by using the four eyes principle, period locks, and commission expense accounting.

7/19/2022

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Dmitri Kemenev
Dmitri Kemenev

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How To Improve Your Sales Commission Compliance

How confident are you in your sales commission compliance? By our estimates, organizations devote 25% of the total sales force expenditure solely to sales commissions. This significant amount means that any errors or inadequate internal controls can lead to negative outcomes such as material audit findings, fraud, or non-compliance with existing regulations.

Ask yourself the following questions to ensure you haven’t missed a critical step in your commission process:

  • Are your organization’s processes around sales commissions designed with both compliance and efficiency in mind?
  • Do you have a structured process for managing corrections to data?
  • Do you have sufficient controls in place to protect against the risk of fraud in your commission process?
  • Do you have an automated process to ensure that the commissions paid are reported accurately?
  • Are you confident you will pass an audit when it comes to your sales commissions?

In order to answer these questions, you should start by looking at the following three primary concepts.

The four eyes principle 

The four eyes principle is one of the key internal controls to prevent fraud and errors in your approval process. You may also know this concept as the Segregation of Duties.

When it comes to sales commissions, the four eyes principle means that the duty of calculating and approving sales commissions relies on more than one person. This typically involves Finance, HR, or even a payee– asking payees to review may help to resolve any issues or disputes prior to payouts.

This four eyes principle means that no participant is in charge of approving or reconciling their own work. Therefore, you create a neat and clear workflow that makes it easy to track down an error, should it have occurred.

It is likely that your organization has a review and approval process in place. However, unless you have a system that provides an audit trail of approvals, you cannot be sure that you are compliant.

Furthermore, you should think about whether the calculations statements are simple and transparent enough for the approvers to properly review them and not unwittingly tick the ‘approval’ box.

Not only is the four eyes principle best practice in your sales commission accounting, it also relates to adhering to SOX compliance.

The Sarbanes-Oxley (SOX) Act is a set of rules that came as a response to a wave of accounting scandals that occurred between 2000 and 2002. All publicly traded companies doing business in the United States and any private company that is preparing for their initial public offering (IPO) must comply with SOX. SOX-type regulations also exist in other countries including France, the Netherlands, and Germany.

Period locks for your payouts

Incentive payouts are subject to period locks or closure control. Once rewards have been calculated, approved, and paid out, no changes should be made to the past records.

It doesn’t mean that corrections cannot be made; it means that corrections should only be reflected in the new payout period.

Depending on the system your organization is currently using, period locks could be difficult to implement. Especially if the payouts are processed in multiple systems or spreadsheets which can be easily altered.

For example, imagine no data is locked and a user is able to make changes to past commission records. The month has ended and the payouts have been made. Then, a user finds out that an error has been made in the previous month's calculations due to a typo. This user then makes a back-posting. Consequently, your actual commission payouts no longer match the data in your records. Therefore, you cannot meet audit compliance and your team is spending hours figuring out where the difference came from.

Back posting is the process of making entries or adjustments to the past. E.g. making a change in March to the January accounting results.

Now imagine the user makes a change that actually impacts your previous period’s tax liability. Reconciling all these payments and ensuring tax compliance will be very challenging.

Locking periods saves your organization from these kinds of headaches.

Commission Expense Accounting

Is your organization required to report financial results following US GAAP or IFRS? If so, then you are most likely familiar with accounting standards such as ASC 606, ASC 340-40, or IFRS 15.

These are the rules that determine how and over which period of time you should expense your sales commissions.

These standards mean that it’s not as straightforward as simply expensing sales commissions as incurred. You may need to take into account the time period the customer would benefit from the products or services after the sale. Some commission must be amortized ratably over time, others must be expensed as incurred. This can become complex. To get it right, you should have your sales commissions tracked at the right level of detail.

IFRS 15 is an International Financial Reporting Standard that was adopted by the International Accounting Standards Board (IASB) back in 2014 and became effective in 2018. It provides international standards on sales commission amortization arising from obtaining a contract with a customer. ASC 606 is an almost identical regulation adopted by the Federal Accounting Standards Board (FASB) to align US General Accounting Principles (GAAP) with IFRS practices.

How EqualTo can help with sales commission compliance

Our team of experts can analyze your current processes and suggest solutions to address compliance gaps. With our no-code commission platform, you can:

  1. Ensure all commission payments are subject to the four eyes principle.
  2. Provide a detailed audit trail of all commission payments.
  3. Enforce period locks for more robust accounting.
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